================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
--------------
Commission File No. 0-25642
COMMONWEALTH INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3245741
(State of incorporation) (I.R.S. Employer Identification No.)
500 West Jefferson Street
PNC Plaza -19th Floor
Louisville, Kentucky 40202-2823
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 589-8100
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No
|_|
The registrant had 16,010,971 shares of common stock outstanding at
October 29, 2003.
================================================================================
COMMONWEALTH INDUSTRIES, INC.
FORM 10-Q
For the Quarter Ended September 30, 2003
INDEX
Part I - Financial Information
Item 1. Financial Statements (unaudited) Page Number
-----------
Condensed Consolidated Balance Sheet as of September
30, 2003 and December 31, 2002 3
Condensed Consolidated Statement of Operations for the
three months and nine months ended September 30, 2003
and 2002 4
Condensed Consolidated Statement of Comprehensive Income
for the three months and nine months ended September
30, 2003 and 2002 5
Condensed Consolidated Statement of Cash Flows for the
nine months ended September 30, 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements 7-19
Item 2. Management's Discussion and Analysis of Financial Condition 20-26
and Results of Operations
Item 4. Controls and Procedures 26
Part II - Other Information
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Balance Sheet
(in thousands except share data)
September 30, December 31,
2003 2002
------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 2,940 $ 13,211
Accounts receivable, net 312 66
Inventories 116,067 125,348
Net residual interest in receivables sold 81,633 81,195
Prepayments and other current assets 5,051 7,133
------------- --------------
Total current assets 206,003 226,953
Property, plant and equipment, net 142,868 146,968
Goodwill 48,872 48,872
Other noncurrent assets 5,423 6,111
------------- --------------
Total assets $ 403,166 $ 428,904
============= ==============
Liabilities
Current liabilities:
Accounts payable $ 47,151 $ 59,594
Accrued liabilities 27,507 28,527
------------- --------------
Total current liabilities 74,658 88,121
Long-term debt 128,190 125,000
Other long-term liabilities 3,921 5,183
Accrued pension benefits 27,043 26,743
Accrued postretirement benefits 70,085 76,670
------------- --------------
Total liabilities 303,897 321,717
------------- --------------
Commitments and contingencies - -
Stockholders' Equity
Common stock, $0.01 par value, 50,000,000 shares authorized,
16,010,971 and 15,997,651 shares outstanding at
September 30, 2003 and December 31, 2002, respectively 160 160
Additional paid-in capital 405,703 405,613
Accumulated deficit (284,999) (277,942)
Accumulated other comprehensive income:
Minimum pension liability adjustment (21,391) (21,391)
Effects of cash flow hedges (204) 747
------------- --------------
Total stockholders' equity 99,269 107,187
------------- --------------
Total liabilities and stockholders' equity $ 403,166 $ 428,904
============= ==============
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statement of Operations
(in thousands except per share data)
Three months ended Nine months ended
September 30, September 30,
-------------------------- ---------------------------
2003 2002 2003 2002
---------- ----------- ----------- -----------
Net sales $ 248,117 $ 253,933 $ 675,205 $ 727,519
Cost of goods sold 231,760 234,571 637,316 681,933
---------- ----------- ----------- -----------
Gross profit 16,357 19,362 37,889 45,586
Selling, general and administrative expenses 10,094 12,524 33,311 34,779
---------- ----------- ----------- -----------
Operating income 6,263 6,838 4,578 10,807
Other income (expense), net 423 332 1,331 818
Interest expense, net (3,728) (3,704) (11,215) (11,406)
---------- ----------- ----------- -----------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 2,958 3,466 (5,306) 219
Income tax expense (benefit) 50 (2,610) 150 (2,532)
---------- ----------- ----------- -----------
Income (loss) before cumulative effect of
change in accounting principle 2,908 6,076 (5,456) 2,751
Cumulative effect of change in accounting principle - - - (25,327)
---------- ----------- ----------- -----------
Net income (loss) $ 2,908 $ 6,076 $ (5,456) $ (22,576)
========== =========== =========== ===========
Basic net income (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle $ 0.18 $ 0.38 $ (0.34) $ 0.17
Cumulative effect of change in accounting principle - - - (1.58)
---------- ----------- ----------- -----------
Net income (loss) $ 0.18 $ 0.38 $ (0.34) $(1.41)
========== =========== =========== ===========
Diluted net income (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle $ 0.18 $ 0.38 $ (0.34) $ 0.17
Cumulative effect of change in accounting principle - - - (1.57)
---------- ----------- ----------- -----------
Net income (loss) $ 0.18 $ 0.38 $ (0.34) $(1.40)
========== =========== =========== ===========
Weighted average shares outstanding
Basic 16,011 15,998 16,011 15,992
Diluted 16,034 16,092 16,011 16,100
Dividends paid per share $ - $ 0.05 $ 0.10 $ 0.15
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statement of Comprehensive Income (Loss)
(in thousands)
Three months ended Nine months ended
September 30, September 30,
------------------------ ---------------------
2003 2002 2003 2002
--------- ----------- -------- --------
Net income (loss) $ 2,908 $ 6,076 $(5,456) $(22,576)
Other comprehensive income, net of tax:
Net change related to cash flow hedges:
Increase (decrease) in fair value of cash flow hedges (1,459) (6,313) 3,807 (3,174)
Reclassification adjustment for (gains) losses included
in net income (1,743) 4,267 (4,758) 9,479
--------- ----------- -------- --------
Net change related to cash flow hedges (3,202) (2,046) (951) 6,305
--------- ----------- -------- --------
Comprehensive income (loss) $ (294) $ 4,030 $(6,407) $(16,271)
========= =========== ======== ========
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statement of Cash Flows
(in thousands)
Nine months ended September 30,
----------------------------
2003 2002
--------- ----------
Cash flows from operating activities:
Net income (loss) $ (5,456) $ (22,576)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operations:
Depreciation 15,417 15,940
Amortization 666 762
Goodwill impairment charge - 25,327
Loss on disposal of property, plant and equipment 68 196
Issuance of common stock in connection with stock awards 90 170
Changes in assets and liabilities:
(Increase) in accounts receivable, net (246) (56)
Decrease in inventories 9,281 2,669
(Increase) in net residual interest in receivables sold (438) (17,875)
Decrease (increase) in prepayments and other current assets 25 (806)
Decrease (increase) in other noncurrent assets 22 (2,419)
(Decrease) increase in accounts payable (12,443) 3,571
Increase in accrued liabilities 86 3,993
(Decrease) in other liabilities (7,547) (4,736)
--------- ----------
Net cash (used in) provided by operating activities (475) 4,160
--------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (11,543) (10,089)
Proceeds from sale of property, plant and equipment 158 23
--------- ----------
Net cash (used in) investing activities (11,385) (10,066)
--------- ----------
Cash flows from financing activities:
Increase in outstanding checks in excess of deposits - 351
Proceeds from long-term debt 75,168 55,700
Repayments of long-term debt (71,978) (55,700)
Repayments of notes receivable from sale of common stock - 1,561
Cash dividends paid (1,601) (2,399)
--------- ----------
Net cash provided by (used in) financing activities 1,589 (487)
--------- ----------
Net (decrease) in cash and cash equivalents (10,271) (6,393)
Cash and cash equivalents at beginning of period 13,211 6,393
--------- ----------
Cash and cash equivalents at end of period $ 2,940 $ -
========= ==========
Supplemental disclosures:
Interest paid $ 7,584 $ 7,551
Income taxes paid (refunds received) 167 (492)
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying condensed consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all the disclosures normally required by accounting principles generally
accepted in the United States of America. The condensed consolidated financial
statements have been prepared in accordance with Commonwealth Industries, Inc.'s
(the "Company's") customary accounting practices and have not been audited. In
the opinion of management, all adjustments necessary to fairly present the
results of operations for the reporting interim periods have been made and were
of a normal recurring nature.
2. Stock-Based Compensation
At September 30, 2003, the Company had stock-based compensation plans which are
described more fully in note 14 to the consolidated financial statements
included in the Company's annual report to stockholders for the year ended
December 31, 2002. As permitted by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company
follows the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its stock option plans under the intrinsic value based method.
Accordingly, no stock-based compensation expense has been recognized for stock
options issued under the plans as all stock options granted under the plans had
an exercise price equal to the market value of the underlying common stock on
the date of grant. Had compensation expense been determined based on the fair
value of the stock options at the grant date consistent with the provisions of
SFAS No. 123, the Company's net loss and basic and diluted net loss per share
would have been increased for the three months and nine months ended September
30, 2003 and the nine months ended September 30, 2002 and the Company's net
income and basic and diluted net income per share would have been reduced for
the three months ended September 30, 2002 to the pro forma amounts which follow
(in thousands except per share data):
Three months ended
September 30,
2003 2002
---- ----
Net income as reported $2,908 $6,076
Less total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects 50 110
------ ------
Pro forma net income $2,858 $5,966
====== ======
Basic net income per share
As reported $0.18 $0.38
Pro forma 0.18 0.37
Diluted net income per share
As reported $0.18 $0.38
Pro forma 0.18 0.37
Nine months ended
September 30,
2003 2002
---- ----
Net income (loss) as reported $(5,456) $(22,576)
Less total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects 234 297
------- --------
Pro forma net income (loss) $(5,690) $(22,873)
======= ========
Basic net income (loss) per share
As reported $(0.34) $(1.41)
Pro forma (0.36) (1.43)
Diluted net income (loss) per share
As reported $(0.34) $(1.40)
Pro forma (0.36) (1.43)
3. Receivables Purchase Agreement
On September 26, 1997, the Company sold all of its trade accounts receivables to
a 100% owned subsidiary, Commonwealth Financing Corp. ("CFC"). Simultaneously,
CFC entered into a three-year receivables purchase agreement with a financial
institution and its affiliate whereby CFC can sell, on a revolving basis, an
undivided interest in certain of its receivables and receive up to $150.0
million from an unrelated third party purchaser at a cost of funds linked to
commercial paper rates plus a charge for administrative and credit support
services. The Company services the receivables for a fee in accordance with the
receivables purchase agreement. In addition, under the agreement, the
receivables are sold with no recourse to the Company and the Company records no
discount on the sale of the receivables. During September 2000, the Company and
the financial institution extended the receivables purchase agreement for an
additional three-year period ending in September 2003 and in October 2002,
extended the agreement for an additional year ending in September 2004. In
addition during September 2001, the Company and the financial institution agreed
to reduce the maximum amount which can be outstanding under the agreement to
$95.0 million and in October 2003, the availability was further reduced to $60.0
million. At September 30, 2003 and 2002, the Company had outstanding under the
agreement $40.0 million and $20.0 million, respectively, and had $81.6 million
and $100.2 million, respectively, of net residual interest in the receivables
sold. The fair value of the net residual interest is measured at the time of the
sale and is based on the sale of similar assets. In the first nine months of
2003 and 2002, the Company received gross proceeds of $62.0 million and $37.0
million, respectively, from the sale of receivables and made gross payments of
$46.0 and $37.0 million, respectively, under the agreement.
4. Inventories
Inventories consist of the following (in thousands):
September 30, 2003 December 31, 2002
------------------ -----------------
Raw materials $ 24,104 $ 22,718
Work in process 51,429 46,676
Finished goods 31,598 43,780
Expendable parts and supplies 14,409 14,320
---------- -----------
121,540 127,494
LIFO reserve (5,473) (2,146)
---------- -----------
$ 116,067 $ 125,348
========== ===========
The Company's raw materials, work in process and finished goods inventories are
valued using the last-in, first-out (LIFO) accounting method in the Company's
aluminum segment and the first-in, first-out (FIFO) and average-cost accounting
methods in the Company's electrical products segment. The FIFO accounting method
is used throughout the entire Company for valuing its expendable parts and
supplies inventory. Inventories of approximately $93.0 million and $98.2
million, included in the above totals (before the LIFO reserve) at September 30,
2003 and December 31, 2002, respectively, are accounted for under the LIFO
method of accounting while the remainder of the inventories are accounted for
under the FIFO and average-cost methods.
5. Provision for Income Taxes
The Company recognized income tax expense of $0.05 million and $0.2 million for
the three months and nine months ended September 30, 2003, respectively,
compared to an income tax benefit of $2.6 million and $2.5 million for the three
months and nine months ended September 30, 2002, respectively. The Company
recorded an adjustment of $2.7 million in the three months ended September 30,
2002 to reduce prior year's income tax accruals.
6. Net Income Per Share Computations
The following is a reconciliation of the numerator and denominator of the basic
and diluted per share computations (in thousands except per share data):
Three months ended
September 30,
2003 2002
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Income before cumulative effect of change in accounting principle $2,908 $6,076
Cumulative effect of change in accounting principle - -
------ ------
Net income $2,908 $6,076
====== ======
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 16,011 15,998
====== ======
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 16,011 15,998
Plus: dilutive effect of stock options 23 94
------ ------
Adjusted weighted average shares 16,034 16,092
====== ======
Basic and diluted per share data:
Income before cumulative effect of change in accounting principle $0.18 $0.38
Cumulative effect of change in accounting principle - -
------ ------
Net income $0.18 $0.38
====== ======
Nine months ended
September 30,
2003 2002
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Income (loss) before cumulative effect of change in accounting principle $(5,456) $2,751
Cumulative effect of change in accounting principle - (25,327)
------- -------
Net income (loss) $(5,456) $(22,576)
======= =======
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 16,011 15,992
====== ======
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 16,011 15,992
Plus: dilutive effect of stock options - 108
------ ------
Adjusted weighted average shares 16,011 16,100
====== ======
Basic per share data:
Income (loss) before cumulative effect of change in accounting principle $(0.34) $0.17
Cumulative effect of change in accounting principle - (1.58)
------ ------
Net income (loss) $(0.34) $(1.41)
====== ======
Diluted per share data:
Income (loss) before cumulative effect of change in accounting principle $(0.34) $0.17
Cumulative effect of change in accounting principle - (1.57)
------ ------
Net income (loss) $(0.34) $(1.40)
====== ======
Options to purchase 577,000 common shares, which equate to 44,004 incremental
common equivalent shares for the nine months ended September 30, 2003 were
excluded from the diluted calculation above as their effect would have been
antidilutive. In addition, options to purchase 1,382,500 and 1,092,000 common
shares for the three months and nine months ended September 30, 2003,
respectively, and 794,000 common shares for both the three months and nine
months ended September 30, 2002 were excluded from the diluted calculations
above because the exercise prices on the options were greater than the average
market price for the periods.
7. Financial Instruments and Hedging Activities
The Company enters into futures contracts, forward contracts and options to
manage exposures to price risk related to aluminum and natural gas purchases.
The Company has designated the futures contracts and forward contracts as cash
flow hedges of anticipated aluminum raw material and natural gas requirements,
respectively. For the second quarter ending June 30, 2003 and the third quarter
ending September 30, 2003, the Company's aluminum futures contracts did not meet
certain "effectiveness" requirements set forth in Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"). Accordingly, as prescribed by the
provisions of SFAS No. 133, the derivative instruments used as hedges were
marked-to-market and the gains and losses during the second and third quarters
of 2003 were recorded currently in the consolidated statement of operations
instead of being deferred in other comprehensive income and included in income
when the underlying hedged transactions occur. The Company's natural gas futures
continue to be deemed "effective" per SFAS No. 133 and accordingly the gains and
losses on these financial instruments are deferred in other comprehensive income
and included in income when the underlying hedged transactions occur.
As of September 30, 2003, the Company had $0.2 million of deferred net losses
recorded in accumulated other comprehensive income. Over the next twelve months,
approximately $0.6 million of deferred net gains are expected to be reclassified
from other comprehensive income into net income as a reduction of cost of goods
sold. As of September 30, 2003, the Company held open aluminum and natural gas
futures and forward contracts having maturity dates extending through December
2005. A net gain of $1.1 million and $1.5 million was recognized as a reduction
in cost of goods sold during the three months and nine months ended September
30, 2003, respectively, and a net loss of $0.05 million and $0.16 million was
recognized in cost of goods sold during the three months and nine months ended
September 30, 2002, respectively, representing the amount of the hedges'
ineffectiveness.
8. Goodwill
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"). The Statement addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes Accounting Principles Board
Opinion No. 17, "Intangible Assets" and amends Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"), to exclude from its scope
goodwill and intangible assets that are not amortized. SFAS No. 121 was
subsequently superseded by Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No.
144").
SFAS No. 142 addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. Under SFAS No. 142, goodwill is no longer to be amortized but
reviewed for impairment annually or more frequently if certain indicators arise,
using a two-step approach. SFAS No. 142 was effective January 1, 2002 and the
Company was required to complete step one of a transitional impairment test by
June 30, 2002 and to complete step two of the transitional impairment test, if
step one indicates that the reporting unit's carrying value exceeds its fair
value, by December 31, 2002. Any impairment loss resulting from the transitional
impairment test was required to be recorded as a cumulative effect of a change
in accounting principle in the quarter ended March 31, 2002. Any subsequent
impairment losses will be reflected in operating income in the consolidated
statement of operations. The net goodwill balances attributable to each of the
Company's reporting units were tested for impairment by comparing the fair value
of each reporting unit to its carrying value. Fair value was determined by using
the valuation technique of calculating the present value of estimated expected
future cash flows (using a discount rate commensurate with the risks involved).
Based upon the transitional impairment test performed upon adoption of SFAS No.
142, the Company recorded a goodwill impairment loss of $25.3 million ($13.5
million in its aluminum segment and $11.8 million in its electrical products
segment). As required by SFAS No. 142 and as previously described, the Company
recorded the goodwill write-down as a cumulative effect of a change in
accounting principle as of January 1, 2002 and restated the Company's first
quarter 2002 financial results.
The following displays the changes in the carrying amount of goodwill in each of
the Company's reportable segments for the three months ended March 31, 2002 (in
thousands). There have been no further changes in the carrying amount of
goodwill since March 31, 2002:
Electrical
Aluminum Products Total
-------- ---------- --------
Balance December 31, 2001 $13,470 $60,729 $74,199
Goodwill impairment loss as a result of transitional
Impairment test related to adoption of SFAS No. 142 (13,470) (11,857) (25,327)
-------- -------- -------
Balance March 31, 2002 $ - $48,872 $48,872
======== ======== =======
The Company has no other intangible assets other than the goodwill discussed
above.
9. Information Concerning Business Segments
The Company has determined it has two reportable segments: aluminum and
electrical products. The aluminum segment manufactures aluminum sheet for
distributors and the transportation, construction, and consumer durables end-use
markets. The electrical products segment manufactures flexible electrical wiring
products for the commercial construction and do-it-yourself markets.
The accounting policies of the reportable segments are the same as those
described in Note 1, "Basis of Presentation and Summary of Significant
Accounting Policies" in the Company's annual report to stockholders for the year
ended December 31, 2002. All intersegment sales prices are market based. The
Company evaluates the performance of its operating segments based upon operating
income.
The Company's reportable segments are strategic business units that offer
different products to different customer groups. They are managed separately
because each business requires different technology and marketing strategies.
Summarized financial information concerning the Company's reportable segments is
shown in the following table for the three months and nine months ended
September 30, 2003 and 2002 (in thousands). The "Other" column includes
corporate related items, including elimination of intersegment transactions, and
as it relates to segment operating income, income and expense not allocated to
reportable segments. Certain expenses and assets relating to information
technology which prior to the first quarter of 2003 had been allocated to
reportable segments are no longer being allocated. Prior period amounts have
been reclassified to conform with current classifications.
Electrical
Aluminum Products Other Total
-------- ---------- --------- ----------
Three months ended September 30, 2003
- -------------------------------------
Net sales to external customers $221,213 $26,904 $ -- $248,117
Intersegment net sales 3,906 -- (3,906) --
Operating income (loss) 11,112 29 (4,878) 6,263
Depreciation 4,608 559 -- 5,167
Amortization -- -- 222 222
Total assets 303,908 86,393 12,865 403,166
Capital expenditures 1,353 77 3,022 4,452
Three months ended September 30, 2002
- -------------------------------------
Net sales to external customers $224,124 $29,809 $ -- $253,933
Intersegment net sales 4,656 -- (4,656) --
Operating income (loss) 11,506 1,137 (5,805) 6,838
Depreciation 4,725 571 -- 5,296
Amortization -- -- 225 225
Total assets 324,589 93,236 1,742 419,567
Capital expenditures 2,975 11 3,909 6,895
Nine months ended September 30, 2003
- ------------------------------------
Net sales to external customers $598,598 $76,607 $ -- $675,205
Intersegment net sales 12,422 -- (12,422) --
Operating income (loss) 22,271 (1,017) (16,676) 4,578
Depreciation 13,740 1,677 -- 15,417
Amortization -- -- 666 666
Total assets 303,908 86,393 12,865 403,166
Capital expenditures 4,920 345 6,278 11,543
Nine months ended September 30, 2002
- ------------------------------------
Net sales to external customers $641,081 $86,438 $ -- $727,519
Intersegment net sales 14,190 -- (14,190) --
Operating income (loss) 21,484 5,069 (15,746) 10,807
Depreciation 14,228 1,712 -- 15,940
Amortization -- -- 762 762
Total assets 324,589 93,236 1,742 419,567
Capital expenditures 5,926 254 3,909 10,089
10. Guarantor Financial Statements
The $125 million of 10.75% senior subordinated notes due 2006 issued by the
Company, and the $30 million revolving credit facility are guaranteed by the
Company's wholly-owned subsidiaries (collectively the "Subsidiary Guarantors"),
other than Commonwealth Financing Corp. ("CFC"), a Securitization Subsidiary (as
defined in the Indenture with respect to such debt) and certain subsidiaries of
the Company without substantial assets or operations. Such guarantees are full,
unconditional and joint and several. Separate financial statements of the
Subsidiary Guarantors are not presented because management has determined that
they would not be material to investors. The following supplemental financial
information sets forth on a condensed combined basis for the Parent Company
Only, Subsidiary Guarantors, Non-guarantor Subsidiaries and for the Company, a
combining balance sheet as of September 30, 2003 and December 31, 2002,
statement of operations for the three months and nine months ended September 30,
2003 and 2002 and statement of cash flows for the nine months ended September
30, 2003 and 2002.
Combining Balance Sheet at September 30, 2003
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ----------- ----------- ------------ --------
Assets
Current assets:
Cash and cash equivalents $ -- $ 2,940 $ -- $ -- $ 2,940
Accounts receivable, net -- 298,466 -- (298,154) 312
Inventories -- 116,067 -- -- 116,067
Net residual interest in receivables sold -- -- 81,633 -- 81,633
Prepayments and other current assets 435 4,616 -- -- 5,051
--------- --------- --------- --------- ---------
Total current assets 435 422,089 81,633 (298,154) 206,003
Property, plant and equipment, net -- 142,868 -- -- 142,868
Goodwill, net -- 48,872 -- -- 48,872
Other noncurrent assets 424,757 4,552 -- (423,886) 5,423
--------- --------- --------- --------- ---------
Total assets $ 425,192 $ 618,381 $ 81,633 $(722,040) $ 403,166
========= ========= ========= ========= =========
Liabilities
Current liabilities:
Accounts payable $ 170,063 $ 47,151 $ 128,091 $(298,154) $ 47,151
Accrued liabilities 9,265 19,000 (758) -- 27,507
--------- --------- --------- --------- ---------
Total current liabilities 179,328 66,151 127,333 (298,154) 74,658
Long-term debt 125,000 3,190 -- -- 128,190
Other long-term liabilities -- 3,921 -- -- 3,921
Accrued pension benefits -- 27,043 -- -- 27,043
Accrued postretirement benefits -- 70,085 -- -- 70,085
--------- --------- --------- --------- ---------
Total liabilities 304,328 170,390 127,333 (298,154) 303,897
--------- --------- --------- --------- ---------
Commitments and contingencies -- -- -- -- --
Stockholders' Equity
Common stock 160 1 -- (1) 160
Additional paid-in capital 405,703 486,727 5,000 (491,727) 405,703
Accumulated deficit (284,999) (17,142) (50,700) 67,842 (284,999)
Accumulated other comprehensive income:
Minimum pension liability adjustment -- (21,391) -- -- (21,391)
Effects of cash flow hedges -- (204) -- -- (204)
--------- --------- --------- --------- ---------
Total stockholders' equity 120,864 447,991 (45,700) (423,886) 99,269
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 425,192 $ 618,381 $ 81,633 $(722,040) $ 403,166
========= ========= ========= ========= =========
Combining Balance Sheet at December 31, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ----------- ----------- ------------ --------
Assets
Current assets:
Cash and cash equivalents $ -- $ 13,211 $ -- $ -- $ 13,211
Accounts receivable, net -- 286,847 -- (286,781) 66
Inventories -- 125,348 -- -- 125,348
Net residual interest in receivables sold -- -- 81,195 -- 81,195
Prepayments and other current assets 435 6,698 -- -- 7,133
--------- --------- --------- --------- ---------
Total current assets 435 432,104 81,195 (286,781) 226,953
Property, plant and equipment, net -- 146,968 -- -- 146,968
Goodwill, net -- 48,872 -- -- 48,872
Other noncurrent assets 419,913 4,913 -- (418,715) 6,111
--------- --------- --------- --------- ---------
Total assets $ 420,348 $ 632,857 $ 81,195 $(705,496) $ 428,904
========= ========= ========= ========= =========
Liabilities
Current liabilities:
Accounts payable $ 161,658 $ 59,594 $ 125,123 $(286,781) $ 59,594
Accrued liabilities 5,859 23,515 (847) -- 28,527
--------- --------- --------- --------- ---------
Total current liabilities 167,517 83,109 124,276 (286,781) 88,121
Long-term debt 125,000 -- -- -- 125,000
Other long-term liabilities -- 5,183 -- -- 5,183
Accrued pension benefits -- 26,743 -- -- 26,743
Accrued postretirement benefits -- 76,670 -- -- 76,670
--------- --------- --------- --------- ---------
Total liabilities 292,517 191,705 124,276 (286,781) 321,717
--------- --------- --------- --------- ---------
Commitments and contingencies -- -- -- -- --
Stockholders' Equity
Common stock 160 1 -- (1) 160
Additional paid-in capital 405,613 486,727 5,000 (491,727) 405,613
Accumulated deficit (277,942) (24,932) (48,081) 73,013 (277,942)
Accumulated other comprehensive income:
Minimum pension liability adjustment -- (21,391) -- -- (21,391)
Effects of cash flow hedges -- 747 -- -- 747
--------- --------- --------- --------- ---------
Total stockholders' equity 127,831 441,152 (43,081) (418,715) 107,187
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 420,348 $ 632,857 $ 81,195 $(705,496) $ 428,904
========= ========= ========= ========= =========
Combining Statement of Operations for the three months ended September 30, 2003
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 248,117 $ -- $ -- $ 248,117
Cost of goods sold -- 231,760 -- -- 231,760
--------- --------- --------- --------- ---------
Gross profit -- 16,357 -- -- 16,357
Selling, general and administrative expenses 52 10,042 -- -- 10,094
--------- --------- --------- --------- ---------
Operating income (loss) (52) 6,315 -- -- 6,263
Other income (expense), net 6,428 423 -- (6,428) 423
Interest income (expense), net (3,468) 652 (912) -- (3,728)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 2,908 7,390 (912) (6,428) 2,958
Income tax expense -- 50 -- -- 50
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle 2,908 7,340 (912) (6,428) 2,908
Cumulative effect of change in accounting principle -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 2,908 $ 7,340 $ (912) $ (6,428) $ 2,908
========= ========= ========= ========= =========
Combining Statement of Income for the three months ended September 30, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 253,933 $ -- $ -- $ 253,933
Cost of goods sold -- 234,571 -- -- 234,571
--------- --------- --------- --------- ---------
Gross profit -- 19,362 -- -- 19,362
Selling, general and administrative expenses 51 12,473 -- -- 12,524
Amortization of goodwill -- -- -- -- --
--------- --------- --------- --------- ---------
Operating income (loss) (51) 6,889 -- -- 6,838
Other income (expense), net 6,904 332 -- (6,904) 332
Interest income (expense), net (3,469) 807 (1,042) -- (3,704)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 3,384 8,028 (1,042) (6,904) 3,466
Income tax expense (benefit) (2,692) 82 -- -- (2,610)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle 6,076 7,946 (1,042) (6,904) 6,076
Cumulative effect of change in accounting principle -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 6,076 $ 7,946 $ (1,042) $ (6,904) $ 6,076
========= ========= ========= ========= =========
Combining Statement of Operations for the nine months ended September 30, 2003
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 675,205 $ -- $ -- $ 675,205
Cost of goods sold -- 637,316 -- -- 637,316
--------- --------- --------- --------- ---------
Gross profit -- 37,889 -- -- 37,889
Selling, general and administrative expenses 224 33,087 -- -- 33,311
--------- --------- --------- --------- ---------
Operating income (loss) (224) 4,802 -- -- 4,578
Other income (expense), net 5,171 1,331 -- (5,171) 1,331
Interest income (expense), net (10,403) 1,807 (2,619) -- (11,215)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (5,456) 7,940 (2,619) (5,171) (5,306)
Income tax expense -- 150 -- -- 150
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle (5,456) 7,790 (2,619) (5,171) (5,456)
Cumulative effect of change in accounting principle -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (5,456) $ 7,790 $ (2,619) $ (5,171) $ (5,456)
========= ========= ========= ========= =========
Combining Statement of Income for the nine months ended September 30, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 727,519 $ -- $ -- $ 727,519
Cost of goods sold -- 681,933 -- -- 681,933
--------- --------- --------- --------- ---------
Gross profit -- 45,586 -- -- 45,586
Selling, general and administrative expenses 224 34,555 -- -- 34,779
Amortization of goodwill -- -- -- -- --
--------- --------- --------- --------- ---------
Operating income (loss) (224) 11,031 -- -- 10,807
Other income (expense), net 10,685 818 -- (10,685) 818
Interest income (expense), net (10,402) 2,303 (3,307) -- (11,406)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 59 14,152 (3,307) (10,685) 219
Income tax expense (benefit) (2,692) 160 -- -- (2,532)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle 2,751 13,992 (3,307) (10,685) 2,751
Cumulative effect of change in accounting principle (25,327) (25,327) -- 25,327 (25,327)
--------- --------- --------- --------- ---------
Net income (loss) $ (22,576) $ (11,335) $ (3,307) $ 14,642 $ (22,576)
========= ========= ========= ========= =========
Combining Statement of Cash Flows for the nine months ended September 30, 2003
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ---------- ---------- --------- ----------
Cash flows from operating activities:
Net income (loss) $ (5,456) $ 7,790 $ (2,619) $ (5,171) $ (5,456)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operations:
Depreciation -- 15,417 -- -- 15,417
Amortization -- 666 -- -- 666
Loss on disposal of property, plant and equipment -- 68 -- -- 68
Issuance of common stock in connection with stock awards 90 -- -- -- 90
Equity in undistributed net income of subsidiaries (5,171) -- -- 5,171 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net -- (11,619) -- 11,373 (246)
Decrease in inventories -- 9,281 -- -- 9,281
(Increase) in net residual interest in receivables sold -- -- (438) -- (438)
Decrease in prepayments and other current assets -- 25 -- -- 25
Decrease (increase) in other noncurrent assets 327 (305) -- -- 22
Increase (decrease) in accounts payable 8,405 (12,443) 2,968 (11,373) (12,443)
Increase (decrease) in accrued liabilities 3,406 (3,409) 89 -- 86
(Decrease) in other liabilities -- (7,547) -- -- (7,547)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities 1,601 (2,076) -- -- (475)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment -- (11,543) -- -- (11,543)
Proceeds from sale of property, plant and equipment -- 158 -- -- 158
-------- -------- -------- -------- --------
Net cash (used in) investing activities -- (11,385) -- -- (11,385)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt -- 75,168 -- -- 75,168
Repayments of long-term debt -- (71,978) -- -- (71,978)
Cash dividends paid (1,601) -- -- -- (1,601)
-------- -------- -------- -------- --------
Net cash (used in) financing activities (1,601) 3,190 -- -- 1,589
-------- -------- -------- -------- --------
Net (decrease) in cash and cash equivalents -- (10,271) -- -- (10,271)
Cash and cash equivalents at beginning of period -- 13,211 -- -- 13,211
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ -- $ 2,940 $ -- $ -- $ 2,940
======== ======== ======== ======== ========
Combining Statement of Cash Flows for the nine months ended September 30, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ---------- ---------- --------- ----------
Cash flows from operating activities:
Net income (loss) $(22,576) $(11,335) $ (3,307) $ 14,642 $(22,576)
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Depreciation -- 15,940 -- -- 15,940
Amortization -- 762 -- -- 762
Goodwill impairment charge 25,327 25,327 -- (25,327) 25,327
Loss on disposal of property, plant and equipment -- 196 -- -- 196
Issuance of common stock in connection with stock awards 170 -- -- -- 170
Equity in undistributed net income of subsidiaries (10,685) -- -- 10,685 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net -- (28,275) -- 28,219 (56)
Decrease in inventories -- 2,669 -- -- 2,669
(Increase) in net residual interest in receivables sold -- -- (17,875) -- (17,875)
(Increase) in prepayments and other current assets -- (806) -- -- (806)
Decrease (increase) in other noncurrent assets 326 (2,745) -- -- (2,419)
Increase (decrease) in accounts payable 7,185 3,571 21,034 (28,219) 3,571
Increase in accrued liabilities 1,091 2,754 148 -- 3,993
(Decrease) in other liabilities -- (4,736) -- -- (4,736)
-------- -------- -------- -------- --------
Net cash provided by operating activities 838 3,322 -- -- 4,160
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment -- (10,089) -- -- (10,089)
Proceeds from sale of property, plant and equipment -- 23 -- -- 23
-------- -------- -------- -------- --------
Net cash (used in) investing activities -- (10,066) -- -- (10,066)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Increase in outstanding checks in excess of deposits -- 351 -- -- 351
Proceeds from long-term debt -- 55,700 -- -- 55,700
Repayments of long-term debt -- (55,700) -- -- (55,700)
Repayments of notes receivable from sale of common stock 1,561 -- -- -- 1,561
Cash dividends paid (2,399) -- -- -- (2,399)
-------- -------- -------- -------- --------
Net cash (used in) provided by financing activities (838) 351 -- -- (487)
-------- -------- -------- -------- --------
Net (decrease) in cash and cash equivalents -- (6,393) -- -- (6,393)
Cash and cash equivalents at beginning of period -- 6,393 -- -- 6,393
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section should be read in conjunction with the condensed consolidated
financial statements and notes thereto included in item 1 of this report in
addition to the consolidated financial statements of the Company and the notes
thereto included in the Company's annual report to stockholders for the year
ended December 31, 2002, including footnote 1 which describes the Company's
significant accounting policies including its use of estimates. See the caption
entitled "Application of Critical Accounting Policies" in this section for
further information. The following discussion contains statements which are
forward-looking rather than historical fact. These forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and involve risks and uncertainties that could
render them materially different, including, but not limited to, the success of
the implementation of the company-wide information system, the effect of global
economic conditions, the ability to achieve the level of cost savings or
productivity improvements anticipated by management, the effect (including
possible increases in the cost of doing business) resulting from war and
terrorist activities or political uncertainties, the ability to successfully
implement new marketing and sales strategies, the impact of competitive products
and pricing, product development and commercialization, availability and cost of
critical raw materials, the ability to effectively hedge the cost of raw
materials, capacity and supply constraints or difficulties, the success of the
Company in implementing its business strategy, and other risks as detailed in
the Company's various Securities and Exchange Commission filings.
Overview
The Company manufactures non-heat treat coiled aluminum sheet for distributors
and the transportation, construction and consumer durables end use markets and
electrical flexible conduit and prewired armored cable for the commercial
construction and renovation markets. The Company's principal raw materials are
aluminum scrap, primary aluminum, copper and steel. Trends in the demand for
aluminum sheet products in the United States and in the prices of aluminum
primary metal, aluminum scrap and copper commodities affect the business of the
Company. The Company's operating results also are affected by factors specific
to the Company, such as the margins between selling prices for its products and
its cost of raw material ("material margins") and its unit cost of converting
raw material into its products ("conversion cost"). While changes in aluminum
and copper prices can cause the Company's net sales to change significantly from
period to period, net income is more directly impacted by the fluctuation in
material margins.
During the first nine months of 2003, shipments of the Company's aluminum sheet
products decreased by 18% from the first nine months of 2002 due to weak
economic conditions, however third quarter 2003 shipments have trended upward to
the highest level in 2003 having increased 10% over the second quarter of 2003
and 6% over the first quarter of 2003. Contributing to the nine-month decline in
aluminum shipments was planned equipment downtime for maintenance and capital
improvement outages during the first quarter of 2003. Despite the decreased
aluminum shipments, material margins for the first nine months of 2003 were
higher than the first nine months of 2002 helping to partially offset the sales
volume decline. The improvement in margin was principally the outcome of
initiatives to: maintain selling price increases introduced in the first quarter
of 2003; increase the volume of product available for the Company's higher value
added products; and continue to actively pursue new customers and new markets
offering higher margin opportunities than the Company's traditional high volume
commodity markets. In addition, the material margin was favorably impacted by a
third quarter 2003 gain of approximately $1.1 million or $0.07 per share
relating to certain aluminum hedge transactions. The Company determined that
hedges in place during the quarter to reduce its exposure to aluminum price
fluctuations did not meet certain "effectiveness" requirements set forth in
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133").
Accordingly, as prescribed by the provisions of SFAS No. 133, the derivative
instruments used as hedges were marked-to-market, giving rise to the $1.1
million gain.
Demand for the Company's electrical products decreased during the first nine
months of 2003. Shipments were down 6% compared to the first nine months of 2002
reflecting weakness in key markets in the electrical products sector,
particularly commercial construction, however third quarter 2003 shipments
increased 12% compared to shipments for the second quarter of 2003 reflecting a
strengthening of demand in the commercial construction market even though net
selling prices were lower. Material margins for the first nine months of 2003
decreased 15% from the first nine months of 2002. Lower net selling prices due
to the competitive price environment combined with higher material costs
resulted in the decrease in material margins for the first nine months of 2003
versus the first nine months of 2002. While manufacturing costs per foot were up
for the nine-month period 2003 versus the same period in 2002, manufacturing
costs per foot for the third quarter 2003 were down compared to the third
quarter of 2002 and the second quarter of 2003 primarily due to lower overtime
labor, group insurance and workers compensation insurance costs.
During the second quarter of 2003, the Company implemented changes to its
postretirement medical insurance program applicable to all non-bargaining unit
Kentucky employees, limiting eligibility and increasing premiums. Because of
these changes, the Company realized a second quarter benefit of approximately
$2.5 million after tax or $0.16 per share and a third quarter benefit of
approximately $2.0 million after tax or $0.12 per share. The Company recognized
the second quarter and third quarter benefits as reductions of approximately
$1.3 million and $1.0 million, respectively, in cost of goods sold and $1.2
million and $1.0 million, respectively, in selling, general and administrative
expenses. In addition to the effect on the second and third quarter of 2003, the
Company estimates that net income will be increased approximately $2.0 million
in the fourth quarter of 2003, approximately $8.3 million in 2004 and
approximately $1.7 million in 2005.
During the second quarter of 2002, the Company completed its transitional test
of goodwill upon adoption of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). Pursuant to this
test, the Company recorded a charge of $25.3 million or $1.58 per diluted share
(before and after tax), as a cumulative effect of a change in accounting
principle, to reflect the impairment of goodwill on the balance sheet as of
January 1, 2002. During the fourth quarter of 2003, the Company will be
conducting its annual impairment review of the Company's remaining goodwill
balance of $48.9 million relating to the Company's Alflex electrical products
reporting unit. See the caption entitled "Cumulative effect of change in
accounting principle" in the following section and note 8 to the condensed
consolidated financial statements for additional information.
Application of Critical Accounting Policies
The Company's discussion and analysis of financial condition and results of
operation is based upon the Company's condensed consolidated financial
statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Company's most critical accounting policies require the use of
estimates relating to the valuation of property, plant and equipment and
goodwill, assumptions and methodology for assessing hedge effectiveness
regarding aluminum and natural gas futures contracts, forward contracts
and options, assumptions for computing pension and postretirement benefits
obligations, allowance for uncollectible accounts receivable, assumptions for
computing workers'compensation liabilities and environmental liabilities. See
the caption entitled "Application of Critical Accounting Policies" in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations section of the Company's annual report to stockholders for the year
ended December 31, 2002 for additional information.
Results of Operations for the three months and nine months ended September 30,
2003 and 2002
Net Sales. Net sales for the quarter ended September 30, 2003 decreased 2% to
$248 million (including $27 million from Alflex) from $254 million (including
$30 million from Alflex) for the same period in 2002. The decrease is due to the
combined effect of lower aluminum and electrical product shipments and lower net
selling prices of electrical products which more than offset an increase in net
selling prices of aluminum products. Unit sales volume of aluminum decreased 16%
to 195.4 million pounds for the third quarter of 2003 from 232.8 million pounds
for the third quarter of 2002. Alflex unit sales volume was 124.5 million feet
for the third quarter of 2003, a decrease of 4% versus 130.3 million feet for
the comparable period in 2002. As mentioned previously, the decreased aluminum
and electrical product shipments were due to difficult business conditions in
both businesses. Net sales for the nine-month period ended September 30, 2003,
were $675 million (including $77 million from Alflex), a 7% decrease from the
$728 million recorded in the first nine months of 2002 (including $86 million
from Alflex). The decrease is due to the combined effect of lower aluminum and
electrical product shipments and lower net selling prices of electrical products
which more than offset an increase in net selling prices of aluminum products.
Unit sales volume of aluminum was 557.3 million pounds for the nine months of
2003, a decrease of 18% from the 680.2 million pounds for the first nine months
of 2002. Alflex unit sales volume was 350.9 million feet for the first nine
months of 2003, a decrease of 6%, versus 374.8 million feet for the comparable
period in 2002. As mentioned previously, the decreased aluminum and electrical
product shipments were due to difficult business conditions in both businesses.
Gross Profit. Gross profit for the quarter ended September 30, 2003, decreased
to $16.4 million (6.6% of net sales) from $19.4 million (7.6% of net sales) for
the same period in 2002. Gross profit for the nine months ended September 30,
2003 was $37.9 million (5.6% of net sales) versus $45.6 million (6.3% of net
sales) for the comparable period in 2002. Contributing to the third quarter and
nine-month decreases in gross profit were decreases in both the Aluminum
business and Alflex. The Aluminum business gross profit declined in both the
third quarter and nine-month period compared to the prior year periods primarily
due to lower shipment volumes, partially offset by the combined effects of
improved material margins, the mark-to-market hedge adjustments mentioned
previously and by cost of goods sold reductions related to the aforementioned
changes to the Company's postretirement medical insurance program. The third
quarter and nine-month gross profit decreases at Alflex reflect the net effects
of lower shipment volume, lower material margins and a mix of higher
manufacturing unit costs for the nine-month period, somewhat offset by lower
manufacturing unit costs in the third quarter.
Operating Income. The Company had operating income of $6.3 million for the third
quarter of 2003 compared with operating income of $6.8 million for the third
quarter of 2002. For the nine-month period ended September 30, 2003, the Company
had operating income of $4.6 million, versus operating income of $10.8 million
for the first nine months of 2002. The decreases in operating income for the
third quarter and nine-month period were primarily due to reduced operating
income at both Alflex and the Aluminum business due to the factors described in
the preceding paragraph, partially offset by lower selling, general and
administrative expenses. Selling, general and administrative expenses during the
third quarter of 2003 were $10.1 million, compared with $12.5 million for the
same period in 2002 and were $33.3 million for the nine months ended September
30, 2003, compared with $34.8 million for the same period in 2002. The third
quarter and nine-month decreases in selling, general and administrative expenses
were primarily due to a reduction in postretirement medical expense relating to
the changes made in the postretirement medical program during the second quarter
of 2003 and lower accruals for employee incentive plans which more than offset
an increase in professional service costs principally associated with the
Company's project to upgrade its information technology systems.
Cumulative effect of change in accounting principle. A non-cash goodwill
impairment charge of $25.3 million was recorded as a cumulative effect of change
in accounting principle as of January 1, 2002 under SFAS No.142. See note 8 to
the condensed consolidated financial statements for additional information.
Net Income. The Company had net income of $2.9 million for the quarter ended
September 30, 2003, compared with net income of $6.1 million for the same period
in 2002. The Company's net loss for the nine months ended September 30, 2003 was
$5.5 million compared with a net loss of $22.6 million for the first nine months
of 2002. The net loss for the first nine months of 2002 includes the $25.3
million goodwill impairment charge described in the preceding paragraph.
Interest expense was $3.7 million for both the quarter ended September 30, 2003
and 2002 and $11.2 million for the nine months ended September 30, 2003,
compared with $11.4 million for the first nine months of 2002. The nine-month
decrease was primarily due to a reduction in interest rates under the Company's
receivables purchase agreement which more than offset the combined effect of an
increase in amounts outstanding under the agreement and a reduction in
investment interest income. Income tax expense was $0.05 million in the third
quarter of 2003 compared to an income tax benefit of $2.6 million for the same
period in 2002 and an income tax expense of $0.2 million for the nine months
ended September 30, 2003 compared to an income tax benefit of $2.5 million for
the same period in 2002. The increase in income tax expense was due to a $2.7
million adjustment recorded in the third quarter of 2002 to reduce prior years'
income tax accruals.
Off-Balance Sheet Arrangement
During 1997, the Company sold all of its trade accounts receivables to a 100%
owned subsidiary, Commonwealth Financing Corp. ("CFC"). Simultaneously, CFC
entered into a three-year receivables purchase agreement with a financial
institution and its affiliate, whereby CFC sells, on a revolving basis, an
undivided interest in certain of its receivables and receives up to $150.0
million from an unrelated third party purchaser at a cost of funds linked to
commercial paper rates plus a charge for administrative and credit support
services. During 2000, the Company and the financial institution extended the
receivables purchase agreement for an additional three-year period ending in
September 2003 and in October 2002 extended the agreement for an additional year
ending in September 2004. In addition during September 2001, the Company and the
financial institution agreed to reduce the size of the facility to $95.0 million
and in October 2003, the availability was further reduced to $60.0 million. At
September 30, 2003 and 2002, the Company had outstanding under the agreement
$40.0 million and $20.0 million, respectively, and had $81.6 million and $100.2
million, respectively, of net residual interest in receivables sold. The fair
value of the net residual interest is measured at the time of the sale and is
based on the sale of similar assets. In the nine months ended September 30, 2003
and 2002, the Company received gross proceeds of $62.0 million and $37.0
million, respectively, from the sale of receivables and made gross payments of
$46.0 million and 37.0 million, respectively, under the agreement. Under the
terms of the agreement, the Company is required to maintain tangible net worth
of $5 million, and to not exceed certain percentages of credit sales for
uncollectible accounts, delinquent accounts and sales returns and allowances.
Should the Company exceed such limitations, the financial institution has the
right to terminate the agreement.
Liquidity and Capital Resources
The Company's operations used cash flows of $0.5 million for the nine months
ended September 30, 2003 compared to providing cash flows of $4.2 million in the
nine months ended September 30, 2002. Working capital increased to $131.3
million at September 30, 2003 from $129.5 million at September 30, 2002.
Capital expenditures were $4.4 million during the three months ended September
30, 2003 and $11.5 million during the nine months ended September 30, 2003
compared to $6.9 million during the three months ended September 30, 2002 and
$10.1 million during the nine months ended September 30, 2002. At September 30,
2003, the Company had commitments of $4.9 million for the purchase or
construction of capital assets. Total capital expenditures for the year 2003 are
estimated to be approximately $15.4 million, all generally related to upgrading
and expanding the Company's manufacturing and other facilities, acquiring and
enhancing software and hardware as part of the Company's information system
redesign project and meeting environmental requirements.
The Company's sources of liquidity are cash flows from operations, the Company's
receivables purchase agreement described previously and borrowings under its $30
million revolving credit facility. The revolving credit facility expires on
March 31, 2005. Availability of advances under the $30 million revolving credit
facility is dependent on the continued satisfaction of certain financial
covenants contained in the revolving credit agreement. While the Company is
currently in full compliance with such financial covenants there is no assurance
that the Company will be able to continue meeting such covenants, as currently
structured, at all times during the next twelve months. In the event the Company
does not meet the requisite covenants it may seek to obtain waivers or
amendments of applicable covenant provisions from the participating lenders. In
any event, the Company believes it has sufficient liquidity available from
operating cash flows and amounts available under its receivables purchase
agreement to fund its working capital requirements, capital expenditures, debt
service, and if necessary, to satisfy any outstanding amounts under its
revolving credit facility for at least the next twelve months.
The Company's revolving credit facility permits borrowings and letters of credit
up to $30.0 million outstanding at any time. As noted in the previous paragraph,
availability is subject to satisfaction of certain covenants and other
requirements. At September 30, 2003 outstanding amounts under the credit
facility consisted of $3.2 million of borrowings and $3.1 million of standby
letters of credit, leaving $23.7 million available at September 30, 2003.
The Company announced on July 31, 2003, that its Board of Directors had
suspended the Company's quarterly cash dividend payments on its common stock as
of the third quarter of 2003 due to the challenging economic conditions and to
ensure continued compliance with the Company's debt instruments regarding the
payment of dividends. The restrictions that limit the payment of cash dividends
are contained in the Indenture relating to the Company's $125 million senior
subordinated notes due in 2006. The Company believes that the restrictions are
likely to result in suspension of the cash dividend through at least the
maturity of the senior subordinated notes in 2006.
The following schedules summarize the Company's contractual cash obligations and
unused availability of financing sources at September 30, 2003 (in thousands).
Payments Due By Period
------------------------------------------------------------
Contractual Cash Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
- ------------------------------------------------------------------------------------------------------------
Long-term debt $128,190 $ -- $3,190 $125,000 $ --
Operating leases 10,715 3,303 3,400 1,450 2,562
Standby letters of credit 3,111 3,111 -- -- --
Outstanding obligation under
receivables purchase
agreement 40,000 40,000 -- -- --
----------------------------------------------------------------------
Total contractual cash obligations $182,016 $46,414 $6,590 $126,450 $2,562
======================================================================
Amount of Availability Per Period
Unused Availability of Total Amounts ------------------------------------------------------------
Financing Sources Available Less than 1 year 1-3 years 4-5 years Over 5 years
- ------------------------------------------------------------------------------------------------------------
Unused revolving credit
facility $ 23,699 $ -- $23,699 $ -- $ --
Unused availability under
receivables purchase
agreement 55,000(1) 55,000(1) -- -- --
----------------------------------------------------------------------
Total available $ 78,699(2) $55,000(1) $23,699 $ -- $ --
======================================================================
(1) The amount was reduced to $20,000 as of October 31, 2003.
(2) The amount was reduced to $43,699 as of October 31, 2003.
The Company has 7 1/4 years remaining on a 10-year guaranteed supply agreement
with Glencore Ltd. ("Glencore"), a leading diversified trading and industrial
company, for the purchase of primary aluminum. Under the agreement, the Company
committed to purchase a minimum of 1.2 billion pounds of P1020/99.7% aluminum at
current market prices from Glencore over the 10-year term.
At September 30, 2003, the Company held firm-priced aluminum purchase and sales
commitments through May 2005 totaling $7 million and $131 million, respectively.
The Company hedges the impact of changes in prices related to these commitments
as explained in the section entitled "Risk Management" which follows.
Risk Management
The price of aluminum is subject to fluctuations due to unpredictable factors on
the worldwide market. To reduce this market risk, the Company follows a policy
of hedging its anticipated raw material purchases based on firm-priced sales and
purchase orders by purchasing and selling futures contracts, forward contracts
and options on the London Metal Exchange ("LME"). The Company also uses forward
contracts and options to reduce its risks associated with its natural gas
requirements.
For the second quarter ending June 30, 2003 and the third quarter ending
September 30, 2003, the Company's aluminum futures contracts did not meet
certain "effectiveness" requirements set forth in Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). Accordingly, as prescribed by the provisions of
SFAS No. 133, the derivative instruments that were used as hedges were
marked-to-market and the gains and losses during the second and third quarter of
2003 were recorded currently in the consolidated statement of operations instead
of being deferred in other comprehensive income and included in income when the
underlying hedged transactions occur. For the foreseeable future, it is likely
that the derivative instruments will continue to be marked-to-market through the
consolidated statement of operations. It is the Company's policy to hedge its
exposure to variability in expected future cash flows relating to its purchases
of scrap aluminum by entering into forward purchase contracts of primary
aluminum. Scrap metal purchases are priced by suppliers in relation to
prevailing primary metal prices, plus or minus certain quality and delivery
differentials. The quality and delivery differentials change from time to time
in relation to market conditions, but there is no derivative instrument
available to correspondingly hedge such changes. Since the forward purchase
contracts used by the Company only hedge the primary metal pricing components,
changes in the other scrap metal pricing components cause the noted
ineffectiveness. However, the derivative instruments are considered by the
Company to be economically appropriate hedges of cash flows associated with the
primary metal pricing components of scrap aluminum purchases. The Company's
natural gas futures continue to be deemed "effective" per SFAS No. 133 and
accordingly the gains and losses on these financial instruments are deferred in
other comprehensive income and included in income when the underlying hedged
transactions occur.
As of September 30, 2003, the Company had $0.2 million of deferred net losses
recorded in accumulated other comprehensive income. Over the next twelve months,
approximately $0.6 million of deferred net gains are expected to be reclassified
from other comprehensive income into net income as a reduction of cost of goods
sold. A net gain of $1.1 million and $1.5 million was recognized in cost of
goods sold during the three months and nine months ended September 30, 2003,
respectively, and a net loss of $0.05 million and $0.16 million was recognized
in cost of goods sold during the three months and nine months ended September
30, 2002, respectively, representing the amount of the hedges' ineffectiveness.
As of September 30, 2003, the Company held open aluminum and natural gas futures
and forward contracts having maturity dates extending through December 2005.
Before entering into futures contracts, forward contracts and options, the
Company reviews the credit rating of the counterparty and assesses credit risk.
While the Company is exposed to certain losses in the event of non-performance
by the counterparties to these agreements, the Company does not expect any such
counterparties to not perform.
Recently Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). This
Interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements" requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 was
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 were to be applied to the first
interim or annual period beginning after June 15, 2003, but in October 2003 the
Financial Accounting Standards Board decided to defer that implementation to the
first interim or annual period beginning after December 15, 2003. Management
does not expect the adoption of this Interpretation to have a material impact on
the Company's results of operations or financial position.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (" SFAS No. 149"). The Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. In addition, the provisions of this Statement are generally to be
applied prospectively. The Statement's initial adoption did not have a material
impact on the Company's results of operations or financial position.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). The Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. The provisions of SFAS
No. 150 apply immediately to all financial instruments entered into or modified
after May 31, 2003, and otherwise are effective at the beginning of the first
interim period beginning after June 15, 2003. The Statement's initial adoption
did not have a material impact on the Company's results of operations or
financial position.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company's management carried out an evaluation, with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures as of the end of the quarter ended September 30, 2003. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in its reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms.
(b) Changes in Internal Control over Financial Reporting
There have not been any changes in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
during the quarter ended September 30, 2003 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to non-environmental legal proceedings and administrative
actions all of which are of an ordinary routine nature incidental to the
operations of the Company. Although it is impossible to predict the outcome of
any legal proceeding, in the opinion of management such proceedings and actions
should not, individually or in aggregate, have a material adverse effect on the
Company's financial condition, results of operations or cash flows, although
resolution in any year or quarter could be material to the results of operation
for that period.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 First Amendment, dated October 14, 2003, to Third Amended and
Restated Credit Agreement among the Company, subsidiaries of
the Company, the several lenders from time to time parties
thereto, and PNC Bank, National Association, as administrative
agent, dated as of March 21, 2002.
31 Rule 13a-14(a)/15d-14(a) Certifications ("Section 302
Certifications").
32 Section 1350 Certifications ("Section 906 Certifications").
(b) Reports on Form 8-K
The following reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended September 30, 2003:
A Form 8-K dated July 22, 2003 reporting the Company's results of
operations for the Second Quarter of 2003.
A Form 8-K dated July 31, 2003 reporting that the Company was
suspending quarterly cash dividend payments on its common stock.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMONWEALTH INDUSTRIES, INC.
By: /s/ Donald L. Marsh, Jr.
------------------------
Donald L. Marsh, Jr.
Executive Vice President and
Chief Financial Officer
Date: November 6, 2003
Exhibit Index
-------------
Exhibit
Number Description
- ------- ---------------------------------------------------------
10.1 First Amendment, dated October 14, 2003, to Third Amended and
Restated Credit Agreement among the Company, subsidiaries of
the Company, the several lenders from time to time parties
thereto, and PNC Bank, National Association, as administrative
agent, dated as of March 21, 2002.
31 Rule 13a-14(a)/15d-14(a) Certifications ("Section 302 Certifications").
32 Section 1350 Certifications ("Section 906 Certifications").